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MCM-Tutorial-5-yws.pptx - MCM Tutorial 5 Week 5 Q1(i What...

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Week 5 MCM- Tutorial 5
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Q1 (i). What are bond ratings? Bond Rating It’s indicating credit quality/ creditworthiness of bond issuance. Bond ratings grades are assigned to bond issues based on extensive, professionally conducted financial analysis to designate investment quality. Ratings basically point to the default risk of an issue . The higher the rating, the lower probability of default the lower the yield of an obligation. A lower rating means greater default risk and has to be compensated with a higher yield.
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Q1 (ii). Discuss the benefit of bond ratings Uses of Bond Rating Individuals can depend on agency ratings as a viable measure to access creditworthiness of the issuer and the issuer’s default risk. These ratings are deemed to be objective and reliable because they are done by an independent party. Investors are able to make comparison among bonds in terms of risk and return buy/ sell decision. Eg. S&P striped UK AAA-rating to reflect the increasing risk resulted from Brexit. Moody and Fitch also advocate such action with concern of UK economic. a. Information Disclosure b. Investors Protection c. Lower Cost of Borrowing d. Aids Pricing Decisions Information Disclosure Investors are difficult to make informed choices because of lack of accessibility or the complexity of information about the corporate issuer. Rating agency has access to public as well as private information pertinent to the assessment of credit risk. Such information is not usually accessible to the individual investor.
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